Mortgage cost over 2 years vs capital remaining (amortization)?

uF0n · 11 June 2017 at 3:09PM

I'm considering two mortgage options, both 2 year fixed, and can't determine the best deal... it should be an easy determination, but I've been looking at amortization calculations and this has created confusion.

Loan amount = £ 280 000
Term = 21 years

Option 1
Rate = 1.59%
Fee = 0
Monthly payment = £1307
Cost over 2 years = (1307 *24) + 0 = 31 368

Option 2
Rate = 1.14%
Fee = 1450
Monthly payment = £1250
Cost over 2 years = (1250 *24) + 1450 = 31 450

Result is that Option 2 costs £82 more over 2 years (maybe not a huge amount in the scheme of a mortgage, but it all counts!).

HOWEVER, then I looked at amortization calculations...
moneysavingexpert.com/mortgages/mortgage-overpayment-calculator
locostfireblade.co.uk/spreadsheet/Index.html
en-gb.calculatestuff.com/financial/loan-amortization-calculator

After 2 years, the capital remaining is:
Option 1 = £257,174
Option 2 = £256,125

With Option 2 the capital is £1049 less at the end of 2 years.

Even though Option 2 costs me £82 more over 2 years, it results in capital being £1049 lower... is this correct, and is option 2 the better option?

Can amortization calculators be used like this to determine the best 2 year deals, or are they only useful when looking over the full term of the loan? I asked the bank about this, and they told me that both rates should result in the same remaining capital at the end of 2 years, and only the amount if interest paid is different if comparing the 2 rates, indicating that rate of capital reduction is independent of interest rate, hence the full amount is paid off at the end of 21 years whatever the interest rate.

I would really appreciate some advice from someone who understands this!!!

dimbo61 · 11 June 2017 at 3:38PM

Hi, I use "whatsthecost " website.
On my mobile right now so can't check your figures.
Once you have put the figures into the Mortgage calculator you can see what you owe after 24 months.

uF0n · 11 June 2017 at 3:55PM

@dimbo61, thanks but whatsthecost calculator for mortgages is close to useless... it only takes one interest rate and applies it to the full term, so not much use when considering 2 year fixed terms while also considering arrangement fees.

As I said in the original post, most of the common calculators just tell the cost of monthly payments plus fee over 2 years... should I also consider the remaining capital debt at the end of 2 years when determining the best deal?

ThePants999 · 11 June 2017 at 3:58PM

Let's look at it super simplistically. On a £280,000 balance, an interest rate 0.45% lower is saving you £1,260 a year in interest (wrong, cos of capital repayment, but not far off). So it's no surprise that it's better over 2 years despite costing £1450 in fees!

Thrugelmir · 11 June 2017 at 4:05PM

uF0n wrote: »

Result is that Option 2 costs £82 more over 2 years (maybe not a huge amount in the scheme of a mortgage, but it all counts!).

Cash outflow is not a cost. Interest is a cost. Reduction in the capital balance simply means you owe less.

So your cash outgoing has been higher. However you owe over a £1,000 less.

At the end of 2 years with option you have a lower starting figure. Therefore will incur less interest. The longer you are are in debt the higher the possibility that interest rates will rise.

RADDERS · 11 June 2017 at 4:07PM

Have you allowed for the £1450 fees in no 2, are you adding it to the balance ?

getmore4less · 11 June 2017 at 4:58PM

uF0n wrote: »

I'm considering two mortgage options, both 2 year fixed, and can't determine the best deal... it should be an easy determination, but I've been looking at amortization calculations and this has created confusion.

Loan amount = £ 280 000
Term = 21 years

Option 1
Rate = 1.59%
Fee = 0
Monthly payment = £1307
Cost over 2 years = (1307 *24) + 0 = 31 368

Option 2
Rate = 1.14%
Fee = 1450
Monthly payment = £1250
Cost over 2 years = (1250 *24) + 1450 = 31 450

Result is that Option 2 costs £82 more over 2 years (maybe not a huge amount in the scheme of a mortgage, but it all counts!).

HOWEVER, then I looked at amortization calculations...
moneysavingexpert.com/mortgages/mortgage-overpayment-calculator
locostfireblade.co.uk/spreadsheet/Index.html
en-gb.calculatestuff.com/financial/loan-amortization-calculator

After 2 years, the capital remaining is:
Option 1 = £257,174
Option 2 = £256,125

With Option 2 the capital is £1049 less at the end of 2 years.

Even though Option 2 costs me £82 more over 2 years, it results in capital being £1049 lower... is this correct, and is option 2 the better option?

Can amortization calculators be used like this to determine the best 2 year deals, or are they only useful when looking over the full term of the loan? I asked the bank about this, and they told me that both rates should result in the same remaining capital at the end of 2 years, and only the amount if interest paid is different if comparing the 2 rates, indicating that rate of capital reduction is independent of interest rate, hence the full amount is paid off at the end of 21 years whatever the interest rate.

I would really appreciate some advice from someone who understands this!!!

WELL DONE...
you got closer first time than most including some brokers that post here.

That is close enough for most cases.

many people get that last bit wrong and miss out the amount owing.

The simple way to compare 2 rates with different fees is...
add the fees(looks like you forgot that bit on option 2)
make the payments the same (A simple adjustment to account for the interest on the difference in payments)

see how much is owing at some point in the future(end of the fix is good)

http://www.whatsthecost.com/mortgage.aspx
(I see you rounded down to £1307 and up to £1250 on the base payment on £280k)

after 2 years

£280,000 @ 1.59% £1307pm £257,190
£281,450 @ 1.14% £1307pm £256,224

£966 better off.

(Close enough but your actual lenders calcs will be different because they don't use standard 12m amortization which is an approximation, they will probably use daily interest and real payment dates which vary because of weekends.
This will be in the region of £0-£30)

You can adjust if you think you can get a better interest rate on the difference in the real contractual payment.
(if you can consider longer term an lower payments)

The key is that for any amortization the lower the rate the more capital you pay off each month on the lower rate as well as paying less interest.

the capital * difference in rate over 2 years gets an approx answer for interest only
That is the best you can do, a repayment mortgage will always be lower saving.

getmore4less · 11 June 2017 at 5:06PM

ThePants999 wrote: »

Let's look at it super simplistically. On a £280,000 balance, an interest rate 0.45% lower is saving you £1,260 a year in interest (wrong, cos of capital repayment, but not far off). So it's no surprise that it's better over 2 years despite costing £1450 in fees!

Interest only always a reasonable starting point if that does not come out better then no point in looking further repayment is always lower.

When the savings are lower closer scrutiny is advised.

uF0n · 11 June 2017 at 5:12PM

Thanks for the input! No one straight out says "Option 2 is better", but this is what I believe I'm reading - correct?

@ThePants999 and @Thrugelmir, I am definitely on board with your comments. When I made my own spreadsheet at the start, to compare options, I was entirely focused on the interest (ignoring repayment), with the attitude that I should select that deal that incurs the lowest interest amount. However, we then spoke to a mortgage adviser who told us to only focus on the cost (i.e. money paid out of pocket) over the 2 years.

The other things I've really learnt over the past week is not to underestimate the cost of moving to a different lender. I was all for moving to HSBC or YBS, that both have lower interest rates and comparable fees, however, the switch would have cost around £1000 in conveyancing (the biggest cost), valuation fee and several smaller expenses... as a result, I've decided to stay with First Direct.

uF0n · 11 June 2017 at 5:29PM

Also, why is the bank telling me that capital will be the same after 2 years whichever deal I take. Are the advisers ignorant, ill-informed, or, worse, trying to put people on the deal that is better for the bank?

getmore4less · 11 June 2017 at 6:06PM

you have 2 complaints in the making,

we then spoke to a mortgage adviser who told us to only focus on the cost (i.e. money paid out of pocket) over the 2 years.

why is the bank telling me that capital will be the same after 2 years whichever deal I take.

Get them both in writing that sort of nonsense needs stamping out.

Mortgage cost over 2 years vs capital remaining (amortization)?

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